Many people think that FHA mortgage loans are only for first time homebuyers. Although FHA loans can be a great option for first time homebuyers, they can be used for many other purposes. Knowing the benefits and drawbacks as well as requirements to qualify for an FHA loan may help you on your next home purchase.
About FHA Loans
FHA loans are insured by the Federal Housing Administration, a government agency run through the Department of Housing and Urban Development (HUD). Though FHA loans are insured by the government, Uncle Sam is not actually the one doing the lending. You can obtain FHA loans through private lenders and large banking institutions nationwide.
How to Qualify for an FHA Loan
You do not have to be a first time homebuyer to obtain an FHA loan. That said, you can only have one FHA loan at a time; FHA loans can only be made on owner-occupied properties.
As of 2010, the minimum required down payment for FHA loans is 3.5%. This is much more appealing and reasonable to people who cannot afford to put down 20% for a conventional loan. Another requirement to obtain an FHA loan is decent credit; typically a credit score of 620 or above, depending on the lender.
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Types of FHA Loans
Lenders offer a variety of FHA loans in addition to the most common type, the 30 year fixed interest. You can also get a fixed interest rate on an FHA loan for 10, 15, 20 or 25 years or you can get an adjustable rate FHA loan. An adjustable rate loan allows for the fluctuation of interest rates at certain periods of time. For example, a 3/1 adjustable rate FHA loan means the interest rate is fixed for 3 years and can adjust every year thereafter. FHA adjustable loans come in the form of a 3/1, 5/1, 7/1 or 10/1 with 30 year terms. These are not as popular as fixed interest FHA loans since they provide more risk to the average homebuyer.
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The main drawback of getting an FHA loan is the mandatory private mortgage insurance (PMI). PMI is a monthly payment that the borrower must make to help protect lenders from the risk of default. PMI is required for those who put less than a 20% down payment on a home with an FHA loan and can cost several hundred dollars every month. According to the Department of Housing and Urban Development, the borrower must pay monthly PMI until he or she has owned the home for at least five years and has reduced the principal of the loan to 78% or less of the original balance.
The Federal Housing Administration has additional loan options for creative homebuyers as well. The FHA 203kloan is a type of rehabilitation loan that can be used to both purchase and fix up a property. FHA 203k loans involve giving the borrower between two and four disbursements of money when specific improvements are made to the property. To qualify for a 203k FHA loan, you must be living in the property and have the repairs made by a licensed contractor.
FHA loans can be an effective tool in allowing first time homebuyers and repeat homebuyers to get into properties when they cannot qualify for conventional loans. If you have questions about qualifying for FHA loans, talk to your trusted lender or banking institution.